While Federal Reserve officials repeated their contention that monetary policy is appropriate and rates can be held if the outlook remains as expected, the situation with Iran could cause preemptive cuts, one noted economist suggests.
Rising oil prices and declining confidence as a result of uncertainty are the two biggest threats to the economy from the situation, according to Grant Thornton Chief Economist Diane Swonk.
“The Fed has already proven its willingness to cut preemptively and will not hesitate to cut more aggressively should tensions with Iran pose a more direct threat to the stability of financial markets and growth,” Swonk wrote in a note.
“The Fed hopes to stem the growth in its balance sheet in 2020 as long as the overnight market for credit stabilizes. Fears of a crunch on overnight funding were overblown; the overnight markets corrected,” she said. “A surge in uncertainty tied to a conflict with Iran could sideline those plans.”
Since businesses are already holding back as a result of uncertainty over trade, the additional “fear and uncertainty about the future,” concerns the Fed. “Rising risks and the toll from uncertainty tied to trade wars were reasons that the Fed did a U-turn and cut rates in 2019.”
In a speech early Thursday, Fed Vice Chair Richard Clarida, again stated “monetary policy is in a good place,” helped along by the “well timed” cuts the Fed made in 2019. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”
While slow growth abroad hurt U.S. “investment, exports, and manufacturing” last year, he said, “there are some indications that headwinds to global growth may be beginning to abate.”
Of course, Clarida reminded that monetary policy is not preset and “if developments emerge that, in the future, trigger a material reassessment of our outlook, we will respond accordingly.”
Separately, Federal Reserve Bank of New York President John Williams warned that low rates may be the new norm. “Low r-star [the longer-run neutral rate of interest] and declining inflation expectations are clear indicators of what’s to come,” he said, according to prepared text of a speech released by the Fed.
The Fed has been reviewing its monetary policy framework, he noted, as it prepares “to deal with the challenges that lie ahead.”
“As long as we double down on the fundamentals of inflation targeting by anchoring inflation expectations at the target level, holding ourselves accountable to delivering on our objectives, and being transparent about our actions, we will be well positioned to handle whatever the future might bring,” he said.
Jobless claims
Initial jobless claims declined to 214,000 on a seasonally adjusted basis in the week ended Jan. 4 from 223,000 the week before, the Labor Department reported Thursday. Continued claims rose to 1.803 million in the week ended Dec. 28 from 1.728 million a week earlier.
Economists polled by IFR Markets expected 222,000 initial claims.
Consumer credit
Consumer credit rose $12.5 billion in November, the Fed reported Wednesday. The figure was less than the $16.7 billion economists expected. Consumer credit rose $19 billion in October.
A $2.4 billion drop in revolving debt, which includes credit cards, was offset by a $14.9 billion gain in non-revolving debt, including car and education loans.
